Freight Index Research Articles

Hedging in the Freight Futures Market

Price risks are everywhere, and a profusion of derivative instruments have been created to hedge them. The BIFFEX Baltic Freight Index futures contract, based on an index of ocean shipping costs for a set of standard routes, is one of the more unusual. An important problem with such a futures contract based on a nonstorable service is that there is no arbitrage trade to enforce cost of carry pricing. This allows considerable basis risk in the contract. In this article, Kavussanos and Nomikos examine the hedging characteristics of the BIFFEX contract within a GARCH framework that takes account of cointegration between the spot and futures markets. They find that allowing for time variation in the hedge ratio does improve hedge performance, but basis risk remains very large compared with other futures markets. A recent change in the contract, to use a narrower index, appears to have reduced the problem somewhat, but not enough to produce much increase in trading activity so far.

The study on the compilation of the China container freight index

Although there exists many kinds of shipping freight indexes, the compilation of a container freight index is still not shown. As such, this paper has taken a further study on the compilation of the China container freight index, which includes selection of calculation formula, determination of freight type, the choice of samples of shipping lines and rules of revision of the index.

Constant vs. time-varying hedge ratios and hedging efficiency in the BIFFEX market

Abstract This paper estimates time-varying and constant hedge ratios, and investigates their performance in reducing freight rate risk in routes 1 and 1A of the Baltic Freight Index. Time-varying hedge ratios are generated by a bivariate error correction model with a GARCH error structure. We also introduce an augmented GARCH (GARCH-X) model where the error correction term enters in the specification of the conditional covariance matrix. This specification links the concept of disequilibrium (as proxied by the magnitude of the error correction term) with that of uncertainty (as reflected in the time varying second moments of spot and futures prices). In- and out-of-sample tests reveal that the GARCH-X specification provides greater risk reduction than a simple GARCH and a constant hedge ratio. However, it fails to eliminate the riskiness of the spot position to the extent evidenced in other markets in the literature. This is thought to be the result of the heterogeneous composition of the underlying index. It seems that restructuring the composition of the Baltic Freight Index (BFI) so as to reflect homogeneous shipping routes may increase the hedging effectiveness of the futures contract. This by itself indicates that the imminent introduction of the Baltic Panamax Index (BPI) as the underlying asset of the Baltic International Financial Futures Exchange (BIFFEX) contract is likely to have a beneficial impact on the market.

Futures hedging when the structure of the underlying asset changes: The case of the BIFFEX contract

This article is concerned with the hedging effectiveness of futures contracts whose underlying asset is an index, when the structure of this index is changing. The case of the freight futures (BIFFEX) contract is examined here. Investigation of this issue is particularly interesting as the composition of its underlying asset, the Baltic Freight Index (BFI), has been revised on a number of occasions in order to improve the hedging performance of the market; previous empirical evidence on the market indicates substantially lower variance reduction (4–19%), compared to other markets (up to 98%). The BFI is a weighted average dry-cargo freight rate index, compiled from actual freight rates on 11 shipping routes that are dissimilar in terms of vessel sizes and transported commodities. The hedging effectiveness of the market is investigated using both constant and time-varying hedge ratios, estimated through bivariate error correction GARCH models. Our results indicate that the effectiveness of the BIFFEX contract as a centre for risk management has strengthened over the recent years as a result of the more homogeneous composition of the index. This by itself indicates that the latest restructuring of the index, in November 1999, which is aimed at increasing its homogeneity even further, is likely to have a beneficial impact on the market. © 2000 John Wiley & Sons, Inc. Jrl Fut Mark 20:775–801, 2000

A Comparison of Models for Forecasting the Baltic Freight Index: Box-Jenkins Revisited

The Baltic Freight Index (BFI) is a widely recognised barometer of dry bulk freight rates. As such, its composition is monitored continuously. In 1993, all handy size trades were expunged from the BFI. This paper tests whether the change in the composition of the BFI has altered its underlying behaviour. This is achieved by applying a Box-Jenkins methodology to a BFI database covering a period following this pivotal change and comparing the properties of the resulting ARIMA model to those of a model previously estimated by applying the same methodology to data from an earlier period. On the basis of a range of criteria, the two models prove to be remarkably similar and the paper concludes that the behaviour of the BFI has not been radically altered even following this radical revision.

Freight rates and shipping costs in the English coastal coal trade: a reply

In my article on shipping productivity in the coal trade between the north east and London, shipping costs were calculated by taking the London pool price, and subtracting the price of coal in the north east and the coal tax. These figures were then analysed as if they were equivalent to freight rates.' Armstrong is correct to say that this methodology led me to overestimate 'freight rates' at the end of the period substantially.2 The most serious consequence of this was an underestimation of productivity change in shipping (as measured by the inverse of the freight rate index) from around i875 to i890, the period during which the adoption of large steam colliers had an obvious impact on the trade. Armstrong's figures, based on published freight rates, are superior to my estimates, but he has missed a freight rate series by Harley that uses sources similar to his, but extended from i838 to I9I3.3 When combined with figures published in Parliamentary Papers, a direct series for freight rates can be extended back to i8i8. Figure i presents this series along with my calculated series. In most years my figures are higher than the freight rate figures, and they are more volatile.4 Table i compares estimates of annual growth rates for the two series. Overall, the freight rate series falls 2.5 times faster than mine, but most of this discrepancy can be attributed to the years from about i875 to I890.5 For the period covered by Armstrong, the rate of decline in the two series is nearly identical. My series differs from the freight rate series for two reasons: first, my calculated series almost certainly contains measurement errors; second, my series measures more than just bare freight costs. The most troublesome aspect of putting together the various series that comprised coal prices in

A short-term adaptive forecasting model for BIFFEX speculation: a Box—Jenkins approach

There are numerous possible advantages to be gained from the accurate prediction of future movements in the Baltic Freight Index (BFI). Because of the difficulties inherent in long-range forecasting, however, the potential for such predictions to provide insight into the future state of the physical dry bulk market is perhaps limited. The greater accuracy of short-term forecasts, on the other hand, facilitates the development of a forecasting model form is justified by the inevitably continuous nature of futures market speculation. Such a model is developed through the application of the Box—Jenkins approach to time series analysis and forecasting. The methodology is presented and the resulting model is evaluated on the basis of objective measures of predictive power and by comparison with alternative forecasting models. Finally, the applicability of the model to the practice of BIFFEX speculation is assessed by judging its performance within a simulated BIFFEX trading environment.

Sources of Productivity Change in American Colonial Shipping, 1675-1775

NE of the most notable features of the seventeenth and eighteenth centuries was the rapid growth of trade and the emergence of a trading Atlantic community. The underlying importance of this growth of trade was the increased specialization and division of labour according to the comparative advantages in production among regions in the Western world. One significant impetus to this improvement came from changes taking place in the primary means of transportation-namely, ocean shipping. This essay gives evidence on sources of changing productivity of shipping in colonial waters for the hundred-year period preceding the American Revolution. The findings reveal that most of the improvement which occurred is attributable to gains in economic organization and reduced uncertainties associated with pirates, privateering, and similar hazards. On the other hand, technological change, which typically is a main source of advancing productivity, appears to have been of minor importance to this industry at that time. The ideal measure of productivity change would require a quantitative measure of output changes per units of input, but unfortunately the data do not lend themselves to this approach. An alternative to this procedure, assuming a competitive industry, is to estimate productivity change by using freight-rate indices for a number of commodity routes.' For this period, the reciprocal of the freightrate indices provides a fairly direct measure of productivity change, because the major input costs of seamen's wages and shipbuilding costs remain almost constant throughout the entire period.2 The data clearly indicate that this industry was undergoing significant changes which had a favourable impact on the growth and development of a trading Atlantic community. The decline in rates varies among commodity routes, but

A TIME SERIES ANALYSIS OF POST-WAR FLUCTUATIONS IN SHIPPING FREIGHTS

When we discuss the business cycle in ocean shipping, the indicators we most commonly employ are the Index of Tramp Shipping Freights, and Index of Tramp Time Charter Rates or Index of Tanker Freight Rates, which are published monthly by the Chamber of Shipping of the United Kingdom or the Norwegian Shipping News. But people usually use these indices without sufficient knowledge about the nature of these economic indicators, namely as to what sort of movement these freight indices inherently trace. More concretely, no sufficient analysis has ever been made as to what extent these indices follow seasonal fluctuations, or whether there is any trend in the movement of these indices, or how are the period and amplitude of cycle, or whether it is susceptible to irregular factors etc. ; nor has hardly any study been made of the interrelation among these various freight indices, except the analysis of Lewis2), which treated the interrelation between voyage charter rates and time charter rates.